U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ____.
Commission file number 21143
CONVERGENCE COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0545056
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 West 500 South, Suite 320
Salt Lake City, Utah 84101
(Address of Principal Executive Offices) (Zip Code)
(801) 328-5618
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No___
As of April 30, 2000, 11,717,701 shares of registrant's Common Stock, par value
$.001 per share, 101,374 shares of the registrant's Series B Preferred Stock,
par value $.001 per share, and 9,728,909 shares of the registrant's Series C
Preferred Stock, par value $.001 per share, were outstanding.
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-QSB
The accompanying unaudited consolidated financial statements of
Convergence Communications, Inc. have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and pursuant to
the rules and regulations of the Securities and Exchange Commission. They do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These financial
statements should be read in conjunction with Note 1 herein and the consolidated
financial statements and notes thereto included in our annual report on Form
10-KSB for the year ended December 31, 1999, which are incorporated herein by
reference. The accompanying financial statements have not been examined by
independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management, all adjustments (consisting of
normal recurring entries) necessary for the fair presentation of our results of
operations, financial position and changes therein for the periods presented
have been included. The results of operations for the three months ended March
31, 2000 may not be indicative of the results that may be expected for the year
ending December 31, 2000.
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2000 AND DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
---------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,247,958 $ 26,303,296
Accounts receivable - net 3,757,357 3,180,748
Inventory - net 367,715 262,177
Other current assets 3,491,746 1,225,490
---------------- ---------------
Total current assets 26,864,776 30,971,711
PROPERTY AND EQUIPMENT - net 29,648,981 28,446,776
INTANGIBLE ASSETS - net 35,241,003 36,660,025
OTHER ASSETS 1,535,948 1,126,011
---------------- ---------------
TOTAL ASSETS $ 93,290,708 $ 97,204,523
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - current portion $ 11,423,346 $ 11,190,987
Accounts payable and accrued liabilities 9,500,360 6,851,249
Due to affiliates 122,356 122,356
---------------- ---------------
Total current liabilities 21,046,062 18,164,592
LONG-TERM LIABILITIES:
Notes payable - long-term portion 11,546,997 11,389,937
Long-term debt (payable to related parties) 2,622,261 2,595,634
Other long-term liabilities 193,899 185,686
---------------- ---------------
Total long-term liabilities 14,363,157 14,171,257
MINORITY INTEREST IN SUBSIDIARIES 4,835,652 5,493,394
---------------- ---------------
Total liabilities 40,244,871 37,829,243
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series "B" Preferred stock; $0.001 par value; 750,000 shares authorized:
101,374 shares issued and outstanding in 2000 and 1999. 101 101
Series "C" Preferred stock; $0.001 par value; 14,250,000 shares authorized:
9,728,909 shares issued and outstanding in 2000 and 1999. 9,729 9,729
Common stock; $0.001 par value; 100,000,000 shares authorized:
11,596,489 and 11,585,489 outstanding in 2000 and 1999, respectively 11,596 11,585
Additional paid-in capital 95,412,346 95,147,893
Accumulated deficit (42,458,296) (35,764,016)
Accumulated other comprehensive income (loss) 70,361 (30,012)
---------------- ---------------
Total stockholders' equity 53,045,837 59,375,280
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,290,708 $ 97,204,523
================ ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000, 1999 AND 1998
- -----------------------------------------------------------------------------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
March 31 March 31 March 31
2000 1999 1998
----------------- ---------------- ---------------
<S> <C> <C> <C>
NET REVENUES FROM SERVICES $ 7,216,423 $ 2,042,488 $ 28,336
----------------- ---------------- ---------------
COSTS AND EXPENSES:
Variable cost of services 4,100,160 980,352 91,800
Salaries, wages and benefits 3,154,721 584,985 85,768
Selling, general and administrative 3,680,208 1,930,687 856,150
Depreciation and amortization 2,908,715 1,205,871 428,897
Stock option compensation expense 264,223 317,005 -
----------------- ---------------- ---------------
Total costs and expenses 14,108,027 5,018,900 1,462,615
----------------- ---------------- ---------------
OPERATING LOSS (6,891,604) (2,976,412) (1,434,279)
OTHER INCOME AND (EXPENSES):
Interest expense, net (444,939) (585,072) 54,049
Net gain (loss) on foreign exchange 38,281 - -
----------------- ---------------- ---------------
Total other expense (406,658) (585,072) 54,049
----------------- ---------------- ---------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (7,298,262) (3,561,484) (1,380,230)
PROVISION FOR INCOME TAXES (53,759) (34,774) -
----------------- ---------------- ---------------
LOSS BEFORE MINORITY INTEREST (7,352,021) (3,596,258) (1,380,230)
MINORITY INTEREST IN LOSS OF SUBSIDIARIES 657,741 355,260 4,096
----------------- ---------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (6,694,280) $ (3,240,998) $ (1,376,134)
================= ================ ===============
Net loss per basic and diluted common share $ (0.49) $ (0.27) $ (0.13)
================= ================ ===============
Weighted-average number of common shares:
Basic and diluted 21,419,157 11,839,656 10,813,180
================= ================ ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
--------------------------------------------------------------
Series "A" Series "B"
----------------------------- -----------------------------
Total Shares Amount Shares Amount
-------------- ------------ ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (661,018)
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares 14,571 685,063 $ 685
Addition of CCI common stock 86,990
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 7,096,500 101,374 $ 101
Issuance of CCI common stock and Series
"A" Preferred shares for cash 10,000,000 150,380 150
Issuance of warrants below fair value 657,143
Issuance of CCI common stock and Series
"A" Preferred shares for cash 300,000 4,083 4
Issuance of options for common shares and
Series "A" Preferred shares below fair value 1,479,074
Net loss for the year ended December 31, 1997 (4,594,294)
-------------- ------------ ------------- --------------- ----------
BALANCE, DECEMBER 31, 1997 14,378,966 839,526 839 101,374 101
Comprehensive loss:
Net loss for the year ended December 31, 1998 (10,230,796)
Other comprehensive loss consisting of
foreign currency translation adjustment (20,515)
-------------- ------------ ------------- --------------- ----------
Total comprehensive loss (10,251,311) - - - -
Issuance of CCI common stock and Series
"A" Preferred shares for cash 4,956,626 91,180 91
Conversion of Series "A" Preferred shares into
common shares - (930,706) (930)
Exchange of Telecom common stock for CCI
common shares 600,000
Issuance of options for common shares
below fair value 1,000,245
-------------- ------------ ------------- --------------- ----------
BALANCE, DECEMBER 31, 1998 10,684,526 - - 101,374 101
Comprehensive loss:
Net loss for the year ended December 31, 1999 (20,277,479)
Other comprehensive loss consisting of
foreign currency translation adjustment (9,497)
-------------- ------------ ------------- --------------- ----------
Total comprehensive loss (20,286,976) - - - -
Issuance of Series "C" Preferred Stock, net 67,794,198
Issuance of warrants 750,677
Repurchases and retirements of common stock (1,215,860)
Forgiveness of related party liability 235,175
Issuance of warrants on debt 162,191
Issuance of options for common shares
below fair value 1,251,349
-------------- ------------ ------------- --------------- ----------
BALANCE, DECEMBER 31, 1999 59,375,280 - - 101,374 101
Comprehensive income (loss):
Net loss for three months ended March 31, 2000 (6,694,280)
Other comprehensive income consisting of
foreign currency translation adjustment 100,373
-------------- ------------ ------------- --------------- ----------
Total comprehensive loss (6,593,907) - - - -
Exercise of stock options 241
Issuance of options for common shares
below fair value 264,223
-------------- ------------ ------------- --------------- ----------
BALANCE, MARCH 31, 2000 $ 53,045,837 - - 101,374 $ 101
============== ============ ============= =============== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONTINUED
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
-----------------------------------
Series "C" Common Stock
----------------------------------- ----------------------------------------
Shares Amount Shares Amount
------------------ ------------- -------------------- ----------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 428,571 $ 429
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares (428,571) (429)
Addition of CCI common stock 1,041,494 1,041
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 450,563 451
Issuance of CCI common stock and Series
"A" Preferred shares for cash 228,658 229
Issuance of warrants below fair value
Issuance of CCI common stock and Series
"A" Preferred shares for cash 24,284 24
Issuance of options for common shares and
Series "A" Preferred shares below fair value
Net loss for the year ended December 31, 1997
------------- ------------- -------------------- ----------------
BALANCE, DECEMBER 31, 1997 - - 1,744,999 1,745
Comprehensive loss:
Net loss for the year ended December 31, 1998
Other comprehensive loss consisting of
foreign currency translation adjustment
------------- ------------- -------------------- ----------------
Total comprehensive loss - - - -
Issuance of CCI common stock and Series
"A" Preferred shares for cash 600,504 600
Conversion of Series "A" Preferred shares into
common shares 9,307,060 9,307
Exchange of Telecom common stock for CCI
common shares 85,714 86
Issuance of options for common shares
below fair value
------------- ------------- -------------------- ----------------
BALANCE, DECEMBER 31, 1998 - - 11,738,277 11,738
Comprehensive loss:
Net loss for the year ended December 31, 1999
Other comprehensive loss consisting of
foreign currency translation adjustment
------------- ------------- -------------------- ----------------
Total comprehensive loss - - - -
Issuance of Series "C" Preferred Stock, net 9,728,909 $9,729
Issuance of warrants
Repurchases and retirements of common stock (152,788) (153)
Forgiveness of related party liability
Issuance of warrants on debt
Issuance of options for common shares
below fair value
------------- ------------- -------------------- ----------------
BALANCE, DECEMBER 31, 1999 9,728,909 9,729 11,585,489 11,585
Comprehensive income (loss):
Net loss for three months ended March 31, 2000
Other comprehensive income consisting of
foreign currency translation adjustment
------------- ------------- -------------------- ----------------
Total comprehensive loss - - - -
Exercise of stock options 11,000 11
Issuance of options for common shares
below fair value
------------- ------------- -------------------- ----------------
BALANCE, MARCH 31, 2000 9,728,909 $9,729 11,596,489 $ 11,596
============= ============= ==================== ================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONTINUED
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Compre-
Paid-in Accumulated hensive Income
Capital Deficit (Loss)
------------------- ---------------------- ------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (661,447)
Reverse acquisition of TIC:
Exchange of TIC common shares for CCI
Series "A" Preferred shares $ 14,315
Addition of CCI common stock 85,949
Exchange of CVV common stock for CCI common
shares and Series "B" Preferred shares 7,095,948
Issuance of CCI common stock and Series
"A" Preferred shares for cash 9,999,621
Issuance of warrants below fair value 657,143
Issuance of CCI common stock and Series
"A" Preferred shares for cash 299,972
Issuance of options for common shares and
Series "A" Preferred shares below fair value 1,479,074
Net loss for the year ended December 31, 1997 (4,594,294)
-------------------- ---------------------- ------------------------
BALANCE, DECEMBER 31, 1997 19,632,022 (5,255,741)
Comprehensive loss:
Net loss for the year ended December 31, 1998 (10,230,796)
Other comprehensive loss consisting of
foreign currency translation adjustment $ (20,515)
-------------------- ---------------------- ------------------------
Total comprehensive loss - (10,230,796) (20,515)
Issuance of CCI common stock and Series
"A" Preferred shares for cash 4,955,935
Conversion of Series "A" Preferred shares into
common shares (8,377)
Exchange of Telecom common stock for CCI
common shares 599,914
Issuance of options for common shares
below fair value 1,000,245
-------------------- ---------------------- ------------------------
BALANCE, DECEMBER 31, 1998 26,179,739 (15,486,537) (20,515)
Comprehensive loss:
Net loss for the year ended December 31, 1999 (20,277,479)
Other comprehensive loss consisting of
foreign currency translation adjustment $ (9,497)
-------------------- ---------------------- ------------------------
Total comprehensive loss - (20,277,479) (30,012)
Issuance of Series "C" Preferred Stock, net 67,784,469
Issuance of warrants 750,677
Repurchases and retirements of common stock (1,215,707)
Forgiveness of related party liability 235,175
Issuance of warrants on debt 162,191
Issuance of options for common shares
below fair value 1,251,349
-------------------- ---------------------- ------------------------
BALANCE, DECEMBER 31, 1999 95,147,893 (35,764,016) (30,012)
Comprehensive income (loss):
Net loss for three months ended March 31, 2000 (6,694,280)
Other comprehensive income consisting of
foreign currency translation adjustment $ 100,373
-------------------- ---------------------- ------------------------
Total comprehensive loss - (6,694,280) 70,361
Exercise of stock options 230
Issuance of options for common shares
below fair value 264,223
-------------------- ---------------------- ------------------------
BALANCE, MARCH 31, 2000 $95,412,346 $ (42,458,296) $ 70,361
==================== ====================== ========================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Three Months
Ended Ended Ended
March 31 March 31 March 31
2000 1999 1998
--------------- --------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,694,280) $ (3,240,998) $ (1,376,134)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,908,715 1,205,871 428,897
Provision for bad debts 35,944 15,000 -
Minority interest in loss of subsidiaries (657,741) (355,260) (4,096)
Issuance of options for common shares below fair value 264,223 317,005 -
Amortization of discount on notes payable 589,085 235,758 -
Issuance of warrants below fair value - 54,246 -
Change in assets and liabilities, net of effects
of acquisitions:
Accounts receivable (612,553) (133,328) (10,257)
Due from affiliate - - 1,359
Inventory (105,538) 68,490 (3,704)
Other current assets (2,266,256) (180,781) (32,347)
Other assets (409,937) (42,273) 3,072
Accounts payable and accrued liabilities 2,763,551 411,171 (13,433)
Due to affiliates - (272,266) 41,604
Other long-term liabilities 8,213 20,325 -
--------------- --------------- -----------------
Net cash used in operating activities (4,176,574) (1,897,040) (965,039)
--------------- --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,691,898) (3,506,368) (271,169)
--------------- --------------- -----------------
Net cash used in investing activities (2,691,898) (3,506,368) (271,169)
--------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - - 3,161,661
Net proceeds from exercise of stock options 241 - -
Net proceeds from issuance of Series "A" Preferred Stock - - 1,794,965
Proceeds from related party note - 5,000,000
Proceeds from related party borrowings - 4,703,811 22,451
Payments on promissory notes (199,666) (4,783,029) -
--------------- --------------- -----------------
Net cash (used by) provided by financing activities (199,425) 4,920,782 4,979,077
--------------- --------------- -----------------
EFFECT OF EXCHANGE RATES ON CASH 12,559 498 -
--------------- --------------- -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,055,338) (482,128) 3,742,869
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,303,296 4,215,281 6,171,515
--------------- --------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,247,958 $ 3,733,153 $ 9,914,384
=============== =============== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the quarter for interest $ 107,577 $ 4,388 $ -
=============== =============== =================
Cash paid during the quarter for income taxes (including prepaid) $ 41,164 $ 27,196 $ -
=============== =============== =================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
1. Basis of Presentation
Convergence Communications, Inc. and subsidiaries is a provider of
integrated broadband communications and Internet services through its own
metropolitan area networks. We operate in recently deregulated and high growth
markets, principally Mexico, Central America and the Andean region of South
America. We offer business entities, governmental agencies and residential
customers high-speed broadband data connections, high-speed and dial-up Internet
access, voice and video services. Our networks use technology based on the
Internet Protocol, or "IP", and asynchronous transfer mode, or "ATM",
technology.
From its inception, we have focused on providing telecommunications
services using high speed transmission networks within and across national
borders. We intend to capitalize on the rapidly growing demand for
telecommunications services in countries emerging from developing and
state-controlled economies and where there is growing liberalization of
regulations governing the provision of telecommunications services.
Our consolidated financial statements include the accounts of all
wholly and majority-owned subsidiaries, as well as Chispa Dos, Inc. ("Chispa"),
the holding entity of Cablevisa, S.A., Multicable S.A. and Cybernet de El
Salvador S.A. We own 32.6% of the capital stock of Chispa, but we have operating
control and 50% of the Board of Directors seats of Chispa. All significant
intercompany accounts and transactions have been eliminated in consolidation.
All capitalized terms not defined in this report have the meanings given them in
our annual report on Form 10-KSB for the year ended December 31, 1999.
2. Net loss per common share and common share equivalent
Net loss per common share and common share equivalents is computed by
both the basic method, which uses the weighted average number of common shares
and the common stock equivalents on a voting basis for the Series B and Series C
preferred stock outstanding, and the diluted method, which includes the dilutive
common shares from stock options and warrants, as calculated using the treasury
stock method.
3. Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. Debt Obligations
Intervan Notes - In December 1999, we financed amounts not paid at
closing in the Intervan Acquisition through the delivery of two promissory
notes, which are due on the first and second anniversaries of the closing. The
promissory note due on December 24, 2000 is in the face amount of $4,500,000 and
is non-interest bearing. The promissory note due on December 24, 2001 is in the
face amount of $1,500,000 and bears interest during the second year at the rate
of 8% per annum. The notes were recorded at the present value of approximately
$5,300,000, which reflects the estimated market rate of interest of 10.75%. The
amounts represented by the promissory notes are subject to downward adjustment
if Intervan suffers recurring revenue losses after the closing.
GBNet Notes - In December 1999, we financed amounts not paid at closing
in the GBNet Acquisition through the delivery of four promissory notes, which
are due on the first through fourth anniversaries of the closing, totaling
$9,000,000 (after discount of promissory notes). The promissory notes, which are
non-interest bearing, are in face amounts sufficient to provide GBM with an
imputed interest rate of 10.75% per annum through their anticipated payment
dates. Our obligation to pay the deferred portions of the purchase price are
secured by a pledge of the shares of GBNet, as well as its operating
subsidiaries. A portion of those pledged shares will be released to us as we pay
down the promissory notes. GBM will be entitled to retain at least 51% of the
pledged shares until we pay all amounts due under the promissory notes.
El Salvador Acquisition Note Refinancing - In May 1999, Chispa obtained
a long-term loan from a third party lender totaling $4,335,000, of which a
portion ($3,607,134) was used to pay the second note payable payment to the
sellers of the El Salvador Entities. The loan is due in May 2004, bears interest
at LIBOR plus 4.75% quarterly and has mandatory annual payments.
In conjunction with the third party loan, a loan that FondElec made to
Chispa was refinanced under the same terms as the third party loan, except that
the FondElec loan was subordinated to the third party lender's position and the
due date for the FondElec loan was changed to January 1, 2000, with an annual
renewal until the third party lender is repaid. In November 1999, Chispa used a
portion of the proceeds from Telematica's purchase of its interest in Chispa
(approximately $3.8 million) to pay FondElec amounts under this loan. (see our
report on Form 10-KSB for the year ended December 31, 1999 for a more detailed
description of these loan transactions).
Under the terms of the loans, we are required to refrain from engaging
in certain types of business activities (including sales of its assets, mergers
or other fundamental corporate transactions) without the consent of the lenders.
The loans are secured by the assets and capital stock of Cablevisa, S.A. de C.V.
and Multicable, S.A. de C. V., which are the two companies providing
telecommunications service to subscribers in El Salvador.
<PAGE>
5. Operating Segment Information
We make key financial decisions based on certain operating results of
our subsidiaries and revenue types. Our operating segment information is as
follows for the three months ended March 31, 2000 and 1999:
NET REVENUES FROM SERVICES BY SUBSIDIARY:
<TABLE>
<CAPTION>
DIAL UP INTERNET ACCESS March 31, 2000 March 31, 1999
------------------ ----------------
<S> <C> <C>
Intervan (in Mexico) $ 101,387 $ -
GBNet (in Central America) 151,806 -
Inter@net (in Venezuela) 263,149 295,464
Chispa (in El Salvador) 18,472 -
Parent Company, eliminations and others 740 -
------------------ ---------------
Consolidated total $ 535,554 $ 295,464
================== ===============
HIGH SPEED DATA March 31, 2000 March 31, 1999
INTERNET ACCESS
------------------ ---------------
Intervan (in Mexico) $ 2,494,361 $ -
GBNet (in Central America) 887,363 -
Inter@net (in Venezuela) 29,290 -
Chispa (in El Salvador) 180,053 -
Parent Company, eliminations and others (21,438) -
------------------ ---------------
Consolidated total $ 3,569,629 $ -
================== ===============
CABLE TELEVISION March 31, 2000 March 31, 1999
------------------ ---------------
Intervan (in Mexico) $ - $ -
GBNet (in Central America) - -
Inter@net (in Venezuela) - -
Chispa (in El Salvador) 1,661,884 1,584,702
Parent Company, eliminations and others - -
------------------ ---------------
Consolidated total $ 1,661,884 $ 1,584,702
================== ===============
OTHER March 31, 2000 March 31, 1999
------------------ ----------------
Intervan (in Mexico) $ 1,050,193 $ -
GBNet (in Central America) 103,578 -
Inter@net (in Venezuela) 12,326 10,240
Chispa (in El Salvador) 258,498 148,616
Parent Company, eliminations and others 24,761 3,466
------------------ ---------------
Consolidated total $ 1,449,356 $ 162,322
================== ===============
TOTAL REVENUES March 31, 2000 March 31, 1999
------------------ ----------------
Intervan (in Mexico) $ 3,645,941 $ -
GBNet (in Central America) 1,142,747 -
Inter@net (in Venezuela) 304,765 305,704
Chispa (in El Salvador) 2,118,908 1,733,318
Parent Company, eliminations and others 4,062 3,466
------------------ ----------------
Consolidated total $ 7,216,423 $2,042,488
================== ================
OPERATING March 31, 2000 March 31, 1999
INCOME (LOSS)
------------------ ----------------
Intervan (in Mexico) $ (1,715,549) $ -
GBNet (in Central America) (683,676) -
Inter@net (in Venezuela) (355,180) (156,380)
Chispa (in El Salvador) (640,312) (279,473)
Parent Company, eliminations and other (3,496,887) (2,540,559)
------------------ ----------------
Consolidated total $ (6,891,604) $(2,976,412)
================== ================
</TABLE>
6. Subsequent Events
MetroTelecom Acquisition - On April 5, 2000, we completed the
acquisition of all of the outstanding stock of a group of companies that
conduct, through directly or indirectly held operating subsidiaries, high speed
data, dial-up Internet, high speed Internet, telephony and subscription cable
television services in Guatemala. In conjunction with this transaction, we
issued 121,212 shares of our common stock. For a more detailed description of
the transaction, see our report on Form 8-K dated April 5, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis relates to our financial
condition and results of operations for the three months ended March 31, 2000
and 1999. This information should be read in conjunction with our consolidated
financial statements and the notes related thereto appearing elsewhere in the
document.
A. OVERVIEW
We are a provider of data and video telecommunications services to
business and residential customers over MANs in Latin America. From our
inception, we have focused on providing telecommunications services in emerging
markets, primarily in Latin America, using a high speed transmission network
within and across national borders. We intend to capitalize on the rapidly
growing demand for telecommunications services in countries emerging from
developing and state-controlled economies and where there is growing
liberalization of regulations governing the provision of telecommunications
services.
As part of our business strategy, we expect to continue to expand
through additional significant acquisitions and strategic alliances. We believe
that additional attractive acquisition opportunities currently exist in Latin
America and it is continually evaluating these opportunities. Certain of these
transactions, if consummated, may be material to our operations and financial
condition. Those acquisitions may not be successfully integrated into our
business operations or result in projected benefits.
B. MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three months ended March 31, 2000 compared to the three months ended March 31,
1999:
Revenues. Our revenues for the three months ended March 31, 2000
totaled $7.2 million, compared to $2.0 million for the same period in 1999,
representing a $5.2 million increase. The following table shows our revenues by
operating subsidiary for the first quarters in 2000 and 1999:
TOTAL REVENUES MARCH 31, MARCH 31,
(in thousands) 2000 1999
-------------- ----------- ----------
Intervan (1) $ 3,646 -
GBNet (1) 1,143 -
Inter@net 305 $ 306
Chispa 2,119 1,733
Parent Company, eliminations and others 3 3
------- ------
Consolidated total $ 7,216 $ 2,042
======= =======
__________________
(1) Indicated subsidiaries were acquired in December 1999.
The increase in revenues was primarily attributable to ownership of the
Intervan and GBNet entities during the three months ended March 31, 2000.
Chispa's customer base grew from 26,684 customers as of March 1999 to 28,161
customers as of March, 2000, an increase of 1,477 customers, or 6%. In addition
to the growth of the customer base during 1999, Chispa began offering dial-up
Internet services and high speed data services to residential and corporate
customers during the latter half of 1999.
Variable Cost of Services. Variable cost of services consists primarily
of bandwidth and cable programming charges. The cost of these services totaled
$4.1 million in the three months ended March 31, 2000, an increase of $3.1
million over March 1999. Of total variable cost of services for the three months
ended March 31, 2000, $2.6 million related to our Intervan operations in Mexico,
$0.6 million related to our GBNet operations in Central America, $0.2 million
related to our Inter@net operations in Venezuela and $0.7 million related to our
Chispa operations in El Salvador.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$3.2 million for the three months ended March 31, 2000, an increase of $2.6
million over the three months ended March 31, 1999. We maintained a total of 490
employees at March 31, 2000, compared to 275 employees at March 31, 1999. The
increase in headcount reflects both the normal increases associated with our
maturing operations and the employees we acquired during the month of December
1999 with our purchases of Intervan and GBNet, which had 141 and 35 employees,
respectively, at March 31, 2000. We increased the salaries, wages and benefits
of our personnel to match market rates and increases in cost of living.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $3.7 million during the three months ended March 31, 2000, an increase of
$1.8 million compared to the three months ended March 31, 1999. The increase in
SG&A expenses reflects growth in our operations, including completing
significant acquisitions in December 1999, as well as the increased development
of our networks. The increase in SG&A reflects:
o consulting, legal and tax advisor fees, which totaled $1.1 million for
the three months ended March 31, 2000, compared with $0.6 million for
the three months ended March 31, 1999
o an increase in travel and promotion costs, to $0.8 million for the
three months ended March 31, 2000, compared to $0.3 million for the
three months ended March 31, 1999. These expenses relate primarily to
the expansion of our operations into Central America, Mexico and
Venezuela and the proposed vendor and equipment financing agreement
with Alcatel
o on a company-wide basis, we recorded a provision for doubtful accounts
of $0.2 million for the three months ended March 31, 2000, compared to
less than $0.1 for the three months ended March 31, 1999 as a result
of acquisitions, increased operations and payment in arrears.
Stock Compensation Expense. We incurred non-cash stock compensation
expense in the three months ended March 31, 2000 of $0.26 million compared to
$0.32 million for the three months ended March 31, 1999.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $2.9 million in the three months ended March 31, 2000,
representing an increase of $1.7 million over the three months ended March 31,
1999. The increase relates primarily to amortization of intangible assets
relating to our acquisitions in December 1999.
Interest Expense, Net. Our net interest expense totaled $0.4 million
during the three months ended March 31, 2000, consisting of interest expense of
$0.7 million and interest income of $0.3 million. Net interest expense during
the three months ended March 31, 2000 decreased slightly over the three months
ended March 31, 1999 due to increased interest income during the three months
ended March 31, 2000. The average interest rate recorded on our indebtedness
outstanding during the three months ended March 31, 2000 was approximately
10.75%, compared to approximately 10% for the three months ended March 31, 1999.
Provision for Income Taxes. We recorded a provision for income taxes of
$0.05 million during the three months ended March 31, 2000, compared to $0.03
million for the three months ended March 31, 1999. Intervan, which operates in
Mexico, recognized the majority of this income tax expense.
Net Loss. We incurred a net loss of $6.7 million in the three months
ended March 31, 2000, an increase of $3.5 million compared to the same period in
1999. The principal reasons for the increased loss were:
o the $1.7 million increase in our depreciation and amortization expense
on intangible assets as a result of acquisitions in December 1999
o the $0.4 million increase in interest expense attributable to our
increased indebtedness as a result of acquisitions in December 1999
o the $2.6 million increase in salary and benefits expense attributable
to acquisitions and as a result of growth in operations
o the $1.8 million increase in SG&A expenses due to the growth in our
operations and as a result of acquisitions
o the above increases were offset by a $2.1 million increase in net
revenues over variable cost of services.
Three months ended March 31, 1999 compared to the three months ended March 31,
1998:
During the quarter ended March 31, 1999, we had recently completed our
development activities and commenced planned principal operations. We were in
the development stage during the quarter ended March 31, 1998.
Revenues. Our revenues for the three months ended March 31, 1999
totaled $2.04 million, compared to $0.03 million for 1998, representing a $2.01
million increase. The following table shows our revenues by operating subsidiary
for 1999 and 1998:
TOTAL REVENUES MARCH 31, MARCH 31,
(in thousands) 1999 1998
--------------- --------- ---------
Inter@net(1) $ 306 $ -
Chispa (1) 1,733 -
Parent Company, eliminations and others 3 28
------ -----
Consolidated total $2,042 $ 28
====== =====
________________
(1) Inter@net and Chispa were both acquired in the third fiscal quarter of 1998.
The increase in revenues for the quarter ended March 31, 1999 was
primarily attributable to having our ownership interests in Inter@net and Chispa
during the three months ended March 31, 1999.
Variable Cost of Services. Our variable cost of services totaled $1.0
million in the three months ended March 31, 1999, an increase of $0.9 million
over the same period in 1998.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled
$0.6 million for the three months ended March 31, 1999, an increase of $0.5
million from the same period in 1998. We maintained a total of 275 employees at
March 31, 1999, compared to fewer than 20 employees at March 31, 1998. The
increase in headcount reflects normal increases in our employee count as our
operations matured and the employees we acquired through our acquisitions during
the months of July and August of 1998 of Chispa and Inter@net, which had 220 and
38 employees, respectively, at March 31, 1999.
Selling, General and Administrative Expenses. We incurred SG&A expenses
of $1.9 million in the three months ended March 31, 1999, an increase of $1.1
million compared to the same period in 1998. The increase in SG&A expenses
reflects growth in our operations, including completing significant acquisitions
in 1998 and increased development of our networks. The increase in SG&A
reflects:
o consulting, legal and tax advisor fees, which totaled $0.6
million for the three months ended March 31, 1999, compared with
$0.3 million for the same period in 1998 for an increase of $0.3
million.
o an increase in travel and promotion costs to $0.3 million
compared to less than $0.1 million for the same period in 1998
for an increase of $0.2 million.
o the increase in the 1999 quarter related primarily to the
expansion of our operations into El Salvador and Venezuela and
researching potential business offerings in New Zealand and
Central America.
Stock Compensation Expense. We incurred non-cash stock compensation
expense in the three months ended March 31, 1999 totaling $0.3 million compared
to none in the same period of 1998.
Depreciation and Amortization. Our depreciation and amortization
expense totaled $1.2 million for the three months ended March 31, 1999,
representing an increase of $0.8 million compared to the same period in 1998.
The significant increase relates primarily to the amortization of intangible
assets relating to acquisitions.
Interest Expense, Net. Our net interest expense totaled $0.6 million in
the quarter ended March 31, 1999, consisting of interest expense of $0.6 million
and interest income of $0.06 million. Net interest expense was less than $0.1
million for the same period in 1998. The significant increase relates primarily
to the interest from debt issued to complete acquisitions in 1998.
Net Loss. We incurred a net loss of $3.2 million in the three months
ended March 31, 1999, an increase of $1.9 million over the same period in 1998.
The principal reasons for the increased loss were:
o the $1.1 million increase in SG&A expenses due to the growth in
our operations and as a result of acquisitions in 1998
o the $0.8 million increase in our depreciation and amortization
expense on intangible assets as a result of acquisitions in 1998
o the $0.5 million increase in salary and benefit expenses due to
the growth in our operations and as a result of acquisitions in
1998
o the $0.3 million increase in stock-based compensation expense to
attract key management
o the above increases were offset by a $1.1 million increase in net
revenues over variable cost of services.
C. LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our cash requirements at the parent
company level through debt and equity transactions. The proceeds from these
transactions were primarily used to fund our investments in, and acquisitions
of, start-up network operations, to provide working capital, and for general
corporate purposes, including the expenses we incurred in seeking and evaluating
new business opportunities. Our foreign subsidiary interests have been financed
by a combination of equity investments and shareholder loans.
We will continue to make significant capital expenditures in the next
several years in connection with building our networks, the further development
of our operations in Mexico, Venezuela and Central America, and new customer
accounts (for which we install our equipment on customer premises). We intend to
meet our capital requirements during 2000 from a combination of the following:
o unused proceeds from our October 1999 Financing
o borrowings under any definitive vendor financing agreement we
execute with Alcatel
o additional private equity transactions relating to the exercise
of outstanding options and warrants, particularly the options we
issued the six accredited investors in connection with our
October 1999 financing transactions.
We anticipate that we will require approximately $46.5 million during
2000 for capital expenditures related to the expansion of our existing
telecommunications business, and that we will require significant amounts
thereafter.
During the first quarter ended March 31, 2000, our operating activities
used $4.2 million, compared with $1.9 million during the quarter ended March 31,
1999. Our investing activities, consisting of capital expenditures for network
equipment, used $2.7 million during the first quarter ended March 31, 2000,
compared with $3.5 million during the quarter ended March 31, 1999. Our
financing activities in the quarter ended March 31, 2000 used $0.2 million to
repay amounts to a third-party bank, compared to $4.9 million that was provided
from proceeds from related party note and borrowing activity during the quarter
ended March 31, 1999.
As of March 31, 2000, we had current assets of $26.9 million, compared
to $31.0 million as of December 31, 1999, for a decrease of $4.1 million. The
decrease in current assets was primarily due to decreases in cash relating to
capital expenditures for network equipment and disbursements for operational
expenses.
We have the ability to moderate our capital spending and losses by
varying the number and extent of our market build out activities and the
services we offer in our various markets. If we elect to slow the speed, or
narrow the focus, of our business plan, we will be able to reduce our capital
requirements and losses. The actual costs of building out and launching our
markets would depend on a number of factors, however, including our ability to
negotiate favorable prices for purchases of network equipment, the number of
customers and the services for which they subscribe, the nature and success of
the services that we may offer, regulatory changes and changes in technology. In
addition, actual costs and revenues could vary from the amounts we expect or
budget, possibly materially, and such variations are likely to affect how much
additional financing we will need for our operations. Accordingly, there can be
no assurance that our actual financial needs will not exceed the anticipated
amounts available to us, including from new, third parties, described above.
To the extent we acquire the amounts necessary to fund our business
plan through the issuance of equity securities, our shareholders may experience
dilution in the value per share of their equity securities. The acquisition of
funding through the issuance of debt could result in a substantial portion of
our cash flow from operations being dedicated to the payment of principal and
interest on that indebtedness, and could render us more vulnerable to
competitive and economic downturns. Our subsidiaries or affiliates could also
obtain financing from third parties, but there can be no assurance our
subsidiaries or affiliates will be able to obtain the financing required to make
planned capital expenditures, provide working capital or meet other cash needs
on terms which are economically acceptable to us.
D. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis"
constitute forward-looking statements concerning our operations, economic
performance and financial condition. Because those statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by those forward-looking statements.
In addition, any statements that express or involve discussions as to
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking and,
accordingly, those statements involve estimates, assumptions and uncertainties
which could cause actual results to differ materially from those expressed in
the forward-looking statements. Accordingly, those types of statements are
qualified in their entirety by reference to, and are accompanied by, the factors
discussed throughout this report. Among the key factors that have a direct
bearing on our results of operations are the potential risk of delay in
implementing our business plan; the political, economic and legal aspects of the
markets in which we operate; competition; and our need for additional
substantial financing. We have no control over some of these factors.
The factors described in this report could cause our actual operating
results to differ materially from those expressed in any forward-looking
statements made by or on behalf of us. Persons reviewing this report, therefore,
should not place undue reliance on those forward-looking statements. Further, to
the extent this report contains forward-looking statements, they speak only as
of the date of this report, and we undertake no obligation to update any
forward-looking statement or statements to reflect the occurrence of
unanticipated events. New factors may emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on our business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the section entitled "Legal Proceedings" in our report on Form
10-KSB for the year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES
On March 3, 2000, we issued 11,000 shares of our common stock
to a third party who exercised an option.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MATTERS SUBMITTED TO A VOTE OF THE COMPANY'S SHAREHOLDERS
None.
ITEM 5. OTHER INFORMATION
MetroTelecom Acquisition - On April 5, 2000, we completed the
acquisition of all of the outstanding stock of a group of companies that
conduct, through directly or indirectly held operating subsidiaries, high speed
data, dial-up Internet, high speed Internet, telephony and subscription cable
television services in Guatemala. For a more detailed description of the
transaction, see our report on Form 8-K dated April 5, 2000.
ITEM 6. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS.
None.
B. REPORTS ON FORM 8-K
We filed four reports on Form 8-K during the quarter ended March 31,
2000.
1. On March 13, 2000, we filed a report on Form 8-K/A which included
the required audited financial statements for the Intervan
acquisition.
2. On February 28, 2000, we filed a report on Form 8-K/A which
included the required audited financial statements for the GBNet
Acquisition.
3. On January 21, 2000, we filed a report on Form 8-K detailing the
results from our annual meeting of shareholders held on January
14, 2000.
4. On January 13, 2000, we filed a report on Form 8-K describing the
Intervan acquisition.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONVERGENCE COMMUNICATIONS, INC.
Date: May 15, 1999 BY /s/ JERRY SLOVINSKI
----------------------------
Jerry Slovinski
Chief Financial Officer
